From April 2021 HMRC introduced new legislation which now means that all medium and large UK businesses must ensure that the correct tax treatment is applied to Off Payroll Workers (contractors). The public sector has been operating this practice since 2017.
This means that companies who use contractors that provide their services through an intermediary (such as a personal service company, agency, partnership) to them, need to carry out the relevant employment status checks to satisfy themselves that the correct tax is being paid in the labour supply chain. This is to make sure that contractors who would otherwise have been employees are paying approximately the same PAYE and National Insurance that an employee would pay.
It is the end users (client who receives the services) responsibility to determine if the Off Payroll Working rules apply. If you think this may apply to your business – the following HMRC checklist can be used to help clarify the employment position of your contractor.
Check employment status for tax – GOV.UK (www.gov.uk)
There must be a contract in place for the services supplied for the above tool to be used to determine whether the contractor is classed as employed or self-employed. HMRC will stand by any determinations given by the tool, providing that all information provided by you remains accurate.
As the new legislation gives HMRC the power to recover any unpaid PAYE or National Insurance from the end user, it is vital that due diligence is carried out on your labour supply chain. There may also be further tax implications with regards to VAT/ CIS if these are applicable to any payments made under contracts. VAT may become irrecoverable on these payments and CIS may become due if a contractor is deemed as falling under the Construction Industry Scheme.
Although you may use an agency to supply the contractors that carry out the services for your business, if the agency fails to operate PAYE and National Insurance correctly and there are unpaid amounts that the agency cannot pay, then HMRC has the power to recover the liabilities from the end user.
Therefore, HMRC recommend carrying out due diligence on your labour supply chain, as not operating off payroll working correctly could result in large amounts of tax becoming due which could result in financial, as well as potential for, legal and reputational damage to your business.
Carrying out due diligence on your labour supply chain can also be good for business as this allows you to assess any potential risks in using certain suppliers, as you will verify more thoroughly their ability to meet contractual obligations, and in turn develop a good working relationship with suppliers.
Carrying out due diligence in this regard should be seen as good business practice, and although it may take extra time to implement, it will help to mitigate the possibility of any potential tax liabilities further down the line which your business may not be prepared for.
HMRC have provided the following helpful advice on applying due diligence to your supply chain.
Advice on applying supply chain due diligence principles to assure your labour supply chains – GOV.UK (www.gov.uk)
10 things about due diligence: supply chain assurance – GOV.UK (www.gov.uk)
If you think your business may be affected by this change, or you require further advice, you can contact HMRC directly regarding this or get in touch with us at firstname.lastname@example.org.